Forming a joint venture (JV) or a partnership with another company benefits both sides in a variety of ways, such as shared capital expenses and human resources, faster access to new technologies, and the ability to draw from a larger, combined talent pool of workers. A joint venture can also help each side tap into new geographical regions and markets, as well as soften potential financial risks.
When larger companies bond with smaller ones, it’s usually to outsource some aspect of the project, such as research and development. The smaller businesses then capitalize on the larger companies’ IT resources to boost the quantity and the quality of their work (ideally).
Whether you run a mid-sized firm with dozens of employees or a small town mom-and-pop gadget shop, read these five tips thoroughly before partnering with another firm.
5 Joint Venture Tips
1. Clearly Define the Agreement Terms
It sounds like a no-brainer, but this could be one of the most overlooked aspects of a JV. Make sure that everyone involved not only understands the basics of the agreement, but also understands the fine details, including goals, financial contributions, human resources and expected length of the deal. Getting the scope of the project in writing helps protect both parties from the JV’s potential failure or from litigation issues, and it also helps the joint venture reach targeted goals.
2. Pick a Structure
The business structure depends on the scope of the project. If you team up with another business for a small-scale job, you probably don’t need to form a new company. However, if both companies are working on a new technology or developing small business software destined for a broad market, it might be better to form a new entity so that both parties have shared ownership.
3. Maintain Strategic Alignment
In all likelihood, each company in the JV has different goals, pressures and shareholders. This can complicate strategic issues when product placement or revenue distribution comes up. Not only should both sides agree to a specific process for making strategic decisions, but they should also regularly communicate thoughts and ideas in relation to change.
4. Carefully Select Governance Protocol
With two companies making decisions, things can get complex, no matter how simple the project. You can avoid — or at least minimize — these issues by establishing a governance policy that works for both sides (and get it in writing!). If each side has equal stake in the game, a balanced governance structure makes sense. But if one company owns more pieces on the proverbial board than the other, some creative negotiation may be required.
5. Always Hire a Business Attorney
Unless your brother or your aunt is a business attorney, hire a lawyer well versed in JVs to view all documents and agreements. So many small details can derail a partnership, or even sink a business, especially if missed by an untrained eye.
Forming a joint venture can be challenging, but it’s also worth the effort when it’s done right. For both sides, it’s about moving the business in a positive direction and reaping rewards through revenue and reputation.
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